Roth IRA - Open One NOW!

The Roth IRA is a special retirement investment account. The key benefit investors gain from this account is related to the taxes paid on the profits.

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Safe Investing Tip:
All of the information (dollar amounts, contribution limits, forms and locations) on this page is subject to change each year. Consult your financial advisor, accountant, or tax attorney. For the latest information, visit the IRS website and search for Publication 590.

What is a Roth IRA?

The Roth IRA is a "tax-advantaged" retirement plan created by United States tax laws, and is named for the chief sponsor; Senator William Roth of Delaware.

This type of account allows you to invest in:

  • Cash and Cash Equivalents (Money Market Accounts, Treasuries, CD Investments, etc.)
  • Equities (Stocks)
  • Debt Instruments (Bonds, Notes, etc.)
  • Derivatives (Stock Options)
  • Annuities

The two main advantages of the Roth IRA over a traditional IRA is the tax structure and your ability to make penalty free withdrawals.

Keep in mind that while you have more choices than in other tax-advantaged plans, the availability of investment instruments depends on the investment broker that oversees your trading account.

Benefits of a Roth IRA

There is no age limit for making contributions.

Regardless of whether your tax rates increase or decrease, your profits are not taxed (if you follow the rules). And if you want to make withdrawals, they are usually tax-free.

  • Direct contributions (i.e. the money you deposited) can be withdrawn, tax free, at any time
  • Converted/Rollover Contributions (i.e. the money you moved from another account) can be withdrawn tax free if your account has been open for at least 5 years
  • For Capital Gains/Dividends (i.e. any profit) can be withdrawn tax free if your account has been open for at least 5 years and you're over 59 1/2

$10,000 can be withdrawn tax-free for a first-time home buyer's "principle residence", but this is the maximum amount that can be withdrawn.

  • The home must be purchased by the owner of the account, a spouse, ancestor or descendant who has not owned a home in the previous 24 months

You can still invest in other retirement investment accounts such as a 401(k) and/or a traditional IRA.

  • Contributions to a traditional IRA may not be tax deductible

A Roth IRA can be transferred to other family members as part of your estate planning activities.

  • Your spouse can combine your account with their own without penalty
  • You can pass your account to your heirs or other beneficiaries, but there are some limitations


There is no tax deduction for the annual contribution, and contributions cannot be used to reduce your adjusted gross income (AGI). Furthermore, earning too much money limits your ability to contribute (most employer sponsored retirement investment plans have a maximum contribution, but are not income limited).

If you contributed to a traditional IRA, you get an immediate tax benefit. With a Roth IRA you must a considerable amount of time before getting your tax break.

  • You must live long enough to withdraw all the money from your account to fully realize the tax benefit. By the time you reach retirement, Congress may change the rules allowing tax free withdrawal.

You face some limitations when it comes to estate planning.

  • If this account type is passed on via a will, the person receiving it is not treated as a beneficiary, and there are tax consequences for "inheriting" the account

Eligibility and Your Contribution

The first thing you need to do is figure out whether or not you meet the eligibility requirements for contributions.

This applies to those of you looking to open an account, as well as those of you who already have an account. Your raises and/or bonuses may put you over the threshold for making contributions!

Eligibility is based on your Modified Adjusted Gross Income (MAGI). Your MAGI is the adjusted gross income(AGI) as shown on your tax return (1040 form), with the following changes:

Subtract the following from your AGI:

  1. Roth IRA conversions included on Form 1040,Form 1040A, and/or Form 1040NR
  2. Roth IRA rollovers from qualified retirement plans included on Form 1040, Form 1040A, and/or Form 1040NR
  3. Minimum required distributions from IRAs (for conversions and rollovers from qualified retirement plans only)

Add the following to your AGI:

  1. Traditional IRA deduction
  2. Student loan interest deduction
  3. Tuition and fees deduction
  4. Domestic production activities deduction
  5. Foreign earned income exclusion
  6. Foreign housing exclusion or deduction
  7. Exclusion of qualified bond interest
  8. Exclusion of employer-provided adoption benefits

You can now determine the amount of your contribution, based on filing status and your MAGI. The following table was updated by the IRS for the 2017.


If Your Filing Status Is...

And Your MAGI Is...


married filing jointly
qualifying widow(er)

MAGI < $184,000

you can contribute up to the limit.

$184,000 < MAGI < $194,000

the amount you can contribute is reduced.

$194,000 < MAGI

you cannot contribute

married filing separately
you lived with your spouse at any time during the year

MAGI = Zero (-0-)

you can contribute up to the limit.

Zero (-0-) < MAGI < $10,000

the amount you can contribute is reduced.

$10,000 < MAGI

You cannot contribute.

Single, head of household, or married filing separately
you did not live with your spouse at any time during the year

MAGI <$117,000

you can contribute up to the limit.

$117,000 < MAGI < $132,000

the amount you can contribute is reduced.

$132,000 < MAGI

You cannot contribute.

Source: IRS Publication 590

Calculation your Reduced Contribution

If the amount you can contribute must be reduced, you can calculate your new amount as follows:
  1. Calculate your modified AGI
  2. Subtract from the amount in Step 1:
    • $184,000 if filing a joint return or qualifying widow(er)
    • $-0- if married filing a separate return and you lived with your spouse at any time during the year
    • $117,000 for all other individuals
  3. Divide the result in Step 2 by $15,000 ($10,000 if filing a joint return, qualifying widow(er), or married filing a separate return and you lived with your spouse at any time during the year)
  4. Multiply the maximum contribution limit (before reduction by this adjustment and before reduction for any contributions to traditional IRAs) by the result in Step 3
  5. Subtract the result in Step 4 from the maximum contribution limit before this reduction

The result from Steps 1-5 is your reduced contribution limit.

How to Leverage a Roth IRA

The tax structure provides you with some unique opportunities when it comes to tax planning.

For example, any activity inside an account (including capital gains, dividends, and interest) does not generate taxes (unless it falls under the UBIT definition).

So here are some sample scenarios you can review with your financial planning professional:

  • You think that the future tax rate on withdrawals from your traditional IRA will be higher than your current tax rate
    • There may be a tax advantage to making contributions to a Roth IRA over a traditional IRA during your working years

  • You plan to leave money to your heirs, and you don't need to make withdrawals from your Roth IRA during retirement
    • A Roth IRA does not require distributions based on age. All other tax-deferred retirement plans require withdrawals to begin by April of the year following the owners 70th birthday plus 6 months
    • Income grows tax free, and beneficiaries that inherit your money are subject to the minimum distribution rules

  • You think you can contribute more to a Roth IRA than a traditional IRA due to your current tax bracket
    • Since a Roth contribution is made from your after-tax income, it is equivalent to a larger, pre-tax contribution to a traditional IRA
    • For example, assuming a 25% tax bracket at both contribution and withdrawal, a contribution of the $5,000 to a Roth IRA is equal to a traditional IRA contribution of $6667

  • You want to reduce estate taxes
    • A Roth IRA can reduce your estate taxes since tax dollars were removed when you earned the money
    • A traditional IRA is valued at the pre-tax level for estate tax purposes

Where to Open an Account?

Almost all discount brokers and full service brokers now offer you the ability to open a Roth IRA.

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Safe Investing Tip:
You may also want to consider an investment broker and/or trading account that participates in Dividend Reinvestment Programs (DRIPs). Any dividend you receive will be automatically reinvested without charging you any commissions or fees.